Notes: (*) EPS growth less one-off profit while PER is calculated on company reported EPS adjusted for bonus & welfare.

– We increase TP for PPC by 4% and upgrade it from M-PF to BUY as a multitude of factors are working in favour of PPC from drought conditions to a vibrant economy that together are having a dual positive affect on utilisation rates, forces strong enough to override the temporary oversupplied situation in the North. Recent share price decline further improve upside.- Fully depreciated asset will lift EPS growth by 40.3% for 2016 while signals from the company suggest positive Pha Lai 1’s PPA re-negotiation next year (but applicable from 2017).

– We retain our forecast on 2015 dividend payment of VND1,500 (8.2% yield) vs. company’s guidance of VND2,000 due to FX loss. However, we expect in 2016 PPC will be able to pay out VND2,000 (11.0% yield) if JPY/VND does not appreciate more than 5% and USD/VND does not appreciate more than 5%. Of note, JPY is anticipated to depreciate by in 2016.

– PPC is trading at forward PER of 5.0x, 50% discount compared to its peers.

Expected drought and higher economic growth benefits both PPC and HPPP. PPC’s output in third quarter increased significantly by 28% and pushed 9M15’s output up by 4% despite 1H15’s decline of 4%, 3Q15 rising due to drought. We revise up utilization rate assumption for PPC and HPPP from 62%-65% to 70%-73% for both years (2015 & 2016). As such, PPC’s core NPAT was revised up by 42%.

PPA for Pha Lai 1 to be the same. According to one member of PPC’s Board of Directors, PPA of Pha Lai 1 which will be re-negotiated after 2015 is expected to remain the same. This relieves the risk that earnings of Pha Lai 2 will be used to make up for worse performance of Pha Lai 1. In addition, BOD member also explained that pressure to dispose PPC’s stake in HPPP is not significant.

PPC cannot pay VND2,000 for 2015 but will be able to 2016. We forecast that PPC’s reported NPAT will be VND636b for 2015 if JPY/VND does not move markedly for the rest of the year. This will allow PPC to pay out VND1,500 per share only, lower than its current guidance of VND2,000 per share. However, such dividend policy is extremely feasible for 2016.

Lower reported income from HPPP as HPPP’s earnings was hurt by 5% appreciation of USD/VND.

Profit before tax

1,302

674

671

-48.4%

Profit after tax

1,054

632

641

-39.2%

NPAT less MI, unadj

1,045

628

636

-39.1%

NPAT less MI, adj

688

687

977

42.0%

EBITDA

1,086

974

1,187

9.4%

Basis points movements

Gross profit margin %

6.6%

8.8%

10.7%

4.1%

Sales & marketing % sales

0.0%

0.0%

0.0%

0.0%

General admin % sales

1.4%

1.5%

1.5%

0.1%

EBIT margin %

5.2%

7.3%

9.2%

4.0%

EBITDA margin %

14.5%

13.5%

14.8%

0.3%

NPAT margin %

14.0%

8.7%

8.0%

-6.0%

Effective tax rate %

19.0%

6.2%

4.5%

-14.5%

Drought benefits PPC as well as HPPP

We revise up utilization rate assumptions for PPC from 65% to 73% in 2015 and from 62% to 73% in 2016. Likewise, HPPP’s utilization rates are adjusted accordingly.

Through 10 months of 2015, coal thermal power plants nationwide increased its contribution to Vietnam electricity system from 32% to 36%. This explains PPC and HPPP’s strong output year to date.

The fact that reservoirs across three regions have just been able to store from 20% to 50% of their design capacity at present indicates that 2016 will be another dry year for hydro power plants. Consequently, thermal power plants will continue to benefit.

Figure 1: PPC & HPPP’s utilization rate assumption changes

HPPP

PPC

Source: PPC, HPPP & VCSC

PPC’s 9M result: FX loss obscures robust core earnings

PPC’s 3Q result came out with revenue growing by 31% and EBIT reached VND234b vs. a loss of VND146b in the same period last year. Core earnings jumped to VND270b, circa six-fold compared to 3Q14A. Output in this 3Q increased significantly by 28% and pushed 9M15’s output up by 4% despite 1H15’s decline of 4%. Severe drought as well as strong GDP growth benefited PPC remarkably despite a temporarily oversupplied situation in the North which we mentioned in our initiation report. However, PPC suffered FX loss of VND 214b vs. FX gain of VND 420b last year, resulting in 3Q15A NPAT declining 78% compared to 3Q14A.

For 9M15A result, revenue was up 7%. Meanwhile, EBIT soared by 304% on higher sales volume as well as lower depreciation expense of VND91b. In addition, 9M15A core NPAT has grown by 71% vs. 9M14A despite reported NPAT’s decline by 11% due to 7% appreciation of JPY vs. VND.

Figure 2: PPC’s 3Q and 9M results (VNDb)

Item

3Q14A

3Q15A

Change (%)

9M14A

9M15A

Change (%)

Electricity output (m kWh)

1,086

1,391

28%

4,367

4,538

4%

Revenue

1,365

1,782

31%

5,642

6,045

7%

Gross profit

-121

257

n.a.

200

578

189%

EBIT

-146

234

n.a.

126

509

304%

Interest income

173

88

-49%

371

243

-35%

Interest expense

-34

-31

-9%

-108

-90

-17%

Forex gain/loss

420

-214

-151%

170

-290

-271%

Income from JV

0

0

n.a.

35

95

171%

PBT

413

77

-81%

594

472

-21%

Reported NPAT

338

73

-78%

495

441

-11%

Core NPAT

34

270

698%

436

746

71%

Source: PPC & VCSC

Similarly, PPC’s 26% stake in associated company – Hai Phong thermal power plant (HPPP)’s earnings was also hurt by VND’s depreciation by 5% as of 30 Sep 2015. 3Q15A suffered huge loss of VND395b due to translation loss on its USD463m-denominated loan. As a consequence, for 9M15A, HPPP delivered core earnings of VND474b but reported NPAT still showed a loss of VND139b.

Through nine months, HPPP also benefit from drought and revenue has grown by 21% on the back of stronger output, however, bottom line saw more subdued growth of 2% due to ongoing expense for first years of operation.

Figure 3: HPPP’s 3Q15A and 9M15A results

Item

3Q14A

3Q15A

Change (%)

9M14A

9M15A

Change (%)

Revenue

1,739

1,968

13%

5,843

7,042

21%

Gross profit

163

192

18%

1,116

1,173

5%

EBIT

139

167

20%

1,064

1,106

4%

Financial income/expense

-183

-607

232%

-812

-1,246

53%

Interest expense

-250

-212

-15%

-598

-632

6%

Forex gain/loss

67

-395

-689%

-214

-614

187%

Reported NPAT

-45

-440

886%

252

-139

n.a

Core NPAT

-111

-45

5%

466

474

2%

Source: HPPP & VCSC

We expect that HPPP’s core earnings will improve gradually owing to better cost control as well as lower interest expense going forward on lower loan balance. HPPP is estimated to contribute ~VND200b core earnings for PPC every year.

In terms of reported NPAT, we estimate that HPPP will only contribute materially for PPC from 2017 onwards. For 2015, HPPP was hurt by VND depreciation of 5% while for 2016 we assume that HPPP will book the final FX loss during construction period of VND392b.

VNDb

Figure 4: HPPP’s earnings outlook

Source: HPPP & VCSC

PPC is expected to pay cash dividend of VND2,000 per share for 2016

We run two scenarios on foreign exchange rates, USD/VND and JPY/VND to see how these rates affect PPC’s capability of dividend payment:

Scenario 1: JPY/VND remains flat and USD/VND appreciates by 2%

Scenario 2: JPY/VND appreciates by 5% and USD/VND appreciates by 5%

We see that PPC will still be able to follow its dividend policy of VND2,000 per share if JPY does not appreciate more than 5% and USD does not appreciate more than 5%.

Figure 5: PPC’s dividend budget vs. reported NPAT

Source: PPC, HPPP & VCSC

Meanwhile, we note that currency experts are forecasting an uptrend for USD/JPY in 2016 given Japan is struggling with soft domestic capital expenditure and challenging global business conditions.

Figure 6: JPY/USD exchange rate trend

Source: The Economy forecast Agency

History of recommendations

Source: Bloomberg & VCSC

VCSC Rating and Valuation Methodology

Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price – current price)/current price + dividend yield, and is not related to market performance. This structure applies from 27 May 2015.

RATING

DEFINITION

BUY

Total stock return including dividends over next 12 months expected to exceed 20%

OUTPERFORM (O-PF)

Total stock return including dividends over next 12 months expected to be positive 10%-20%

MARKET PERFORM (M-PF)

Total stock return including dividends over next 12 months expected to be between negative 10% and positive 10%

UNDERPERFORM (U-PF)

Total stock return including dividends over next 12 months expected to be negative 10%-20%

SELL

Total stock return including dividends over next 12 months expected to be below negative 20%

NOT RATED

The company is or may be covered by the Research Department but no rating or target price is assigned either voluntarily or to comply with applicable regulation and/or firm policies in certain circumstances, including when VCSC is acting in an advisory capacity in a merger or strategic transaction involving the company.

RATING SUSPENDED

A rating that happens when fundamental information is insufficient to determine an investment rating or target. The previous investment rating and target price, if any, are no longer in effect for this stock.

Unless otherwise specified, these performance parameters only reflect capital appreciation and are set with a 12-month horizon. Future price volatility may cause temporary mismatch between upside/downside for a stock based on market price and the formal recommendation, thus these performance parameters should be interpreted flexibly.

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Disclaimer

Analyst Certification of Independence

I , Duong Dinh, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.

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